The Impact of Short-Sale Constraints on Asset Allocation Strategies via the Backward Markov Chain Approximation Method

Carl Chiarella () and Chih-Ying Hsiao ()

No 171, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper considers an asset allocation strategy over a finite period under investment uncertainty and short-sale constraints as a continuous time stochastic control problem. Investment uncertainty is characterised by a stochastic interest rate and inflation risk. If there are no short-sale constraints, the optimal asset allocation strategy can be solved analytically. We consider several kinds of short-sale constraints and employ the backward Markov chain approximation method to explore the impact of short-sale constraints on asset allocation decisions. Our results show that the short-sale constraints do indeed have a significant impact on the asset allocation decisions.

New Economics Papers: this item is included in nep-bec
Date: 2005-11-01
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Journal Article: The Impact of Short-Sale Constraints on Asset Allocation Strategies via the Backward Markov Chain Approximation Method (2006)
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